All new stock market investors get nervous when they see all the options in the order screen.
All those different options in the order screen confuse them.
This episode will clarify all those confusions.
This will be a waste of time for all stock market experts as it is targeted towards newbies. Save yourself some time by skipping this episode.
For the rest of you, Hi, My name is Vijay Mohan. You are watching "Investment Insights".
Let's get started with how to place an order for a mutual fund.
In India, all mutual funds are available as two versions. Direct and Regular.
Regular funds are offered through full service brokerages like icicidirect.
We should never buy a "regular" fund as its expense ratio will be more than double when compared to the "direct" version.
That means, the fees for the regular fund is way higher when compared to direct fund. So we should be buying only a direct fund.
Let's take a look at Canara Robeco Emerging Equities as an example.
The expense ratio of its regular version is 1.86%. But the direct version's expense ratio is only 0.64%.
That means, fees for a 1000 Rs balance would be Rs. 18.6 per year for a regular fund where as it will be just Rs. 6.4 for a direct fund.
We can see that the fees for regular is almost triple the amount of direct fund.
Though this difference looks smaller now, it becomes a big difference in long term.
So we should always buy a direct version of the fund.
The first option to buy a direct fund is to buy directly from the fund house itself.
This "Canara Robeco Emerging Equities" can be bought directly in canara robeco itself.
If you find it difficult to open accounts individually with different fund houses, then the other option is to open an account with brokerage that offers direct funds.
Brokerages like Zerodha, Kuvera, Groww etc offer direct funds.
You can choose the one that you like and buy direct fund thru them.
We do not have the confusion of "Direct Vs Regular" in USA.
All mutual funds here in USA are same versions.
Now we know which version of mutual fund to buy. But how do we place an order?
Ordering mutual fund is a simple and straight forward process.
Order form needs just two information. First is, entering which fund we are trying to buy.
We are looking at the Mutual Fund order form in Charles Schwab brokerage.
I have chosen Vanguard Total Stock Market Index VTSAX here.
The next information we have to provide is, how much money we want to invest in this fund. We should enter that amount here.
Which fund we are trying to buy, how much we are investing - those two are the key information that we need to provide.
All brokerages will ask those two clearly.
Other than those, each brokerage could be asking few more information.
Here in Charles Schwab, they are asking whether the fees for this transaction should be added to the total or deduct from the total amount.
They are also asking for whether to reinvest the dividends and capital gains.
These questions could be different for different brokerages. For those questions, choose your preference and answer.
Brokerage will not buy a mutual fund immediately after we submit our order.
All orders get executed only by the end of the day based on the NAV price.
All brokerages have a cut off time for order submission. That could be different for different brokerages.
Usually it will be 3 PM. All orders that are submitted before 3 PM will be executed by the end of the day.
But if we submit our order after 3 PM, those orders will be executed only by the end of next day.
Many do not realize this. They get confused on why their order was not executed.
So know the cut off time for your brokerage and try to submit your order before that cut off time.
Let's say that I submit an order for Rs. 5,000 before 3 PM.
If the NAV price of that fund ends up at Rs. 100 by the end of that day, then I get 50 units of the fund allotted.
I should be able to see those fund units allotted in my account next day.
Now let's see how we can place an order for Stocks and ETFs.
Stocks and ETFs trade at real time. That means, if we submit an order for stocks or ETF's, the order will immediately go to the market.
Depending on the order type, it could get executed immediately. Or it could wait till the conditions of the order is met and then get executed.
It is bit confusing right? Let's take a look at this thru an example. All those confusions will go away.
We are looking at the screen of ordering Stocks and ETFs in Charles Schwab.
We will see the same workflow in almost all brokerages.
Let's say that we have $5,000 in our hand. Let's see how we can order Tesla shares with that money.
Tesla's ticker symbol is TSLA. Let us enter that here.
After we enter the ticker symbol, we can see the current price details of Tesla below.
Next Action section. We have to choose whether we are trying to Buy or Sell here.
We are trying to buy now. So let's choose Buy.
Next is quantity. How many shares are we trying to buy should be entered here.
Now the current price is Tesla is almost $812. For the $5,000 we have, we can buy 6 shares. So we should enter 6 here.
Next is Order Type. This is the one we need to pay attention. Most of us get confused in this section here.
Market Order is brokerage would immediately submit our order to market and buy the shares regardless of its price. There is no waiting time.
Oh. That's a good thing. Then by default we should be using this option. Right?
No. Because it has some issues that we need to be aware of.
When we submitted the order, the price of Tesla's share was at $812.
But what if there were no sellers in the market after we submit our order? What if there was just one seller, but he is asking for $900 per share?
Our order will get executed immediately for $900 as we have chosen market order.
Because market order means, buy the shares regardless of the price in the market and so the brokerage will buy the shares in the market without any regard to the price.
If our order gets executed for $900, we would have overpaid for the shares by almost 10%.
This is an extreme example. The chances of this happening in Tesla is very less.
Because, look at the volume of Tesla. Within the first one and a half hour of market opening, 7 million shares have been traded.
That means, 7 million shares have been exchanged hands.
When Tesla has a strong volume like that, there is no chance of this 10% price difference coming from a market order.
But if this is in a small cap company in India, they could potentially have only 10,000 to 20,000 shares traded every day.
Trading volume could be very low. If the volume is low, it has higher chances of leading to this price difference.
Not just for buying, selling could result in an unfavorable price for us as well.
That is why we should avoid placing a market order.
Some brokerages show market order by default. Do not choose that even by mistake.
By default, we should be choosing the "Limit Order" option.
In limit order, we can enter the maximum price that we would like to pay for the share.
If the traded price of that stock is higher than our limit, the order does not get executed. Brokerage will wait for the price to get below our limit price.
So what we should do is, we should submit the order with 10 to 50 paise higher than the current price as limit price.
Now Tesla is trading for $811.85. So we could submit the limit order for $812.
Depending on how fast the share price is changing in the market, this order could executed immediately or it could wait for a while.
if the market is rising steeply, then this order might not get executed at all.
We have to adjust the limit price depending on the market situation.
If we have submitted our limit order for $812, brokerage will execute this order only if the share price is equal to or below $812.
If the price rise above $812, then the brokerage will wait till the price comes below $812.
We should be using similar limit order while selling as well.
We should submit the sell order after deciding on the limit price.
If the price goes below our limit price for selling, brokerage will not sell our shares.
Brokerage will wait till the price rises above our set limit price before attempting to sell our shares.
So in short, we should always be using limit order as default. We should never be using market order.
Other order types are targeted for advanced traders. Long term investors like us can ignore those.
But still let's cover that quickly. For a Stop order, we can enter the price at which we would like to place an order.
When the share price goes below that stop price, brokerage will immediately submit the order as market order.
What does that mean? If I have submitted an order for Tesla with $812 as stop order, that order would not have been submitted if the share price of Tesla stayed above $812.
But when the share price goes below $812, brokerage would immediately submit the order to the market.
Once it is submitted, even if the share price goes above $812, that order will get filled.
But in a limit order, this order would have never been executed if the price is above $812. This is the difference between a stop order and a limit order.
What if we combine a stop order and a limit order? That is the stop limit order.
If we place an order with $811 as stop price and $812 as limit price, then the brokerage would send this order to market only when the share price goes below $811.
But when it sends the order to the market, it sets the price limit to $812.
That means, this order will get executed only if the share price is less than $812. This is Stop Limit order.
But like I already said, we do not these options at all. We should just stick to limit order.
Next is timing. This timing defines the validation period of our order.
It is always good to choose "Day Only" option. This will make sure that our order is valid only for that day.
If the order does not get executed that day, it becomes invalid.
We have to submit this order again the next day.
But if you would like to have this oder to be valid for 60 days, then you can choose this "Good until Canceled" option.
If you ask me, it is better to avoid this option.
We will not remember to track this order for 60 days. So it is better to go with "Day only" option.
We can ignore other options as they are not important for long term investors.
That is all there to order stocks or ETFs. We will soon meet again in another episode. Thank You.